Monti announced over the weekend he would resign once the 2013 budget is approved, raising questions over who will take the reins of the euro zone's third largest economy after elections expected in February.

Top European shares on the FTSEurofirst 300 index were down 0.5 percent by 5 a.m. EDT with a 3.5 percent fall on Milan's Ftse Mib and 2 percent on Madrid's IBEX flanked by smaller falls in London , Paris and Frankfurt .

The euro was down over 0.2 percent at $1.2898, trading towards a two-week low of $1.2876 on Friday, and Italian bonds fell sharply, with yields on benchmark 10-year debt up 27 basis points at 4.82 percent.

"It is disappointing as Monti had gained significant credibility in the markets over the last 12 months and now the whole thing is being questioned," said Audrey Childe-Freeman at BMO Capital Markets in London.

Government bonds of Spain, the other major euro zone economy deep in crisis, also fell and the cost of insuring both Italian and Spanish debt against default rose.

Poor economic data compounded the jitters. French industrial output was much weaker than expected in October and tepid export growth reduced Germany's trade surplus to its lowest level in over half a year.

This pointed to more than a brief, shallow economic dip as Germany's euro zone export markets struggle.

"Besides weak industrial output this is another bleak piece of data that points to contraction in the fourth quarter - and a proper contraction at that," said Thomas Hessler, an economist at HSBC Trinkaus said of the German trade data.

CHINA LIFT

Balancing the European concerns, data from China showed factory output in the world's number two economy accelerated to an eight-month high in November. The upbeat figures followed a surprise drop in U.S. unemployment figures on Friday and allowed investors to look past some more disappointing Chinese trade data.

Copper prices hit their highest in almost two months on the Chinese data, gold firmed 0.2 percent to around $1,707 an ounce and oil snapped five straight days of losses to climb back above $107 a barrel.

"It does appear, based on the evidence of the data, that the Chinese economy has bottomed out," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

In contrast to the later European gloom, Asian equity investors pushed MSCI's broadest index of Asia Pacific shares outside Japan to a fresh 16-month high.

Back in currency markets, the dollar rose about 0.3 percent against a basket of major currencies due to the euro's weakness although an expected announcement later this week of more Federal Reserve bond buying limited the gains.

Wall Street looked set for a weak open with futures for the S&P 500 indicating a 0.25 percent fall and the Dow seen down 0.1 percent.

(Additional reporting by Anooja Debnath in London and; Manash Goswami in Singapore,; Editing by David Stamp)